Effective Debt Management

Indeed, total household debt rose to an all-time high of $13.15 trillion
at year-end 2017, according to the Federal Reserve Bank of New York's Center for Microeconomic Data.

And, as of year-end 2017, some 4.7% of outstanding debt was in some
stage of delinquency. Of the $619 billion of debt that is delinquent, the
Federal Reserve Bank of New York noted that $406 billion is seriously
delinquent — at least 90 days late or “severely derogatory.”

Meanwhile, the U.S. household saving rate is floating around 3.4%, well
below its average of 8.26% from 1959 until 2018. That's also a dramatic drop
from its all-time high of 17% in May of 1975 and not much above its record
low of 1.90% in July of 2005.

So, what might you do if you’re burdened with debt? Here are
some effective ways to drop debt and bolster savings:

Tap into the power
of websites and apps

Linda Jacob, author of No More Paycheck to Paycheck recommends PowerPay, a free website designed by Utah
State University Extension. PowerPay helps you develop a personalized,
self-directed debt-elimination plan, says Jacob, who is also a financial
counselor with Consumer Credit of Des Moines.

A user enters debt balance, the minimum payment due and interest rate.
The site "will then calculate how quickly you can pay off your debt, and
will even build you a calendar so you know how much to pay on each debt, each
month,” says Jacob.

There
are savings-related apps, such as Even,
which allows you to set aside money from each paycheck to pay
bills each month, says Kristen Holt, CEO of credit counseling, debt
management and financial education services concern GreenPath Financial
Wellness.

"For example, if most of your bills are due in the second half of
the month, these apps will hold aside enough money from your first paycheck of
the month so you don’t have to use your whole second paycheck for bills,"
she says. "This leaves you with a more consistent amount of money left to
spend after every paycheck."

Divide and conquer

Holt also suggests setting up automatic drafts from a main checking
account into multiple “savings” accounts, titling each account separately
(travel, credit card debt, utilities and the like) and only pay bills from
the titled accounts.

“If you are paid 26 times/year and do this every paycheck, you will have
extra to go towards paying down debt faster," she says.

Plan your payments
strategically

Holt recommends paying off the smallest balance first.

“Pay the minimum on your other accounts while putting any extra funds
towards this one account,” she says.

“This keeps you motivated. Then, once you
pay off this smaller balance you move to the next debt, and repeat until all of
the accounts are paid.”

Another version of this strategy (sometimes called
"snowballing"): pay down the balance with the highest interest
rate first, while paying the minimum on the others. Vertex42.com, a company
that provides free and low-priced spreadsheet templates, has a free
spreadsheet that can help you manage this.

Capitalize on credit
card rewards

Hold says to use those credit cards rewards to pay off
a credit card balance rather than splurging on something else.

"Rather than cashing out rewards on a gift card or transferring the
rewards balance into your bank account, many reward programs will allow you to
apply your points towards your credit card balance," she says.

Use credit cards
wisely

Seek credit cards with the best interest rate, so more of your payment
go to the principal and less is wasted on interest, says Holt.

She recommends finding zero-interest balance-transfer offers. “Determine
how many months the offer is valid and subtract a month, then divide your total
balance into manageable monthly payments and pay down the debt before the offer
expires,” she says. Then, remove the credit card from your wallet so you're not
tempted to use it, she says.

April Lewis-Parks, director of education and corporate
communications at credit-counseling organizationConsolidated Credit, says
to use a credit card balance transfer “if someone has a limited amount of
debt to repay – less than $5,000 and has a good credit score of 650 and
above."

Debt-management plan
vs. a debt-consolidation loan

Lewis-Parks says a debt-management plan, also known as a DMP, is a
repayment plan that you can set up through a credit counseling agency.

"It basically rolls multiple debts into a single consolidated
repayment schedule," she says. "The credit counselor helps you find a
payment that works for your budget. Then they negotiate with your creditors to
reduce or eliminate your interest rate, as well as stop any future
penalties."

By contrast, Lewis-Parks says debt consolidation is a financial process where
you combine multiple debts into a single monthly payment. There are two basic
ways to do this, she says:

Take out a personal
debt-consolidation loan

Execute a debt
transfer using a balance transfer credit card

If someone owes more than $10,000, he or she is usually better off with
a personal debt-consolidation loan (depends on your credit score). If
the credit score is below 650, then a debt-management plan through a
non-profit agency may be the best solution for paying off debt quickly and
efficiently, says Lewis-Parks.

With debt consolidation and debt transfer, "you need good
credit in order to qualify for the lowest interest rate possible," she
says. "Reducing the interest rate makes it easier to pay off your debt
faster. So, even if you could qualify for a personal loan with bad credit, the
rate you receive probably won’t help. That’s why these solutions really only
work if you have a good credit score."

See what you can
sell

“I’ll ask clients if they have an asset they can sell in order to pay
the debt,” says Jacob. “I’ve had clients sell a boat, snowmobiles, their kid’s
clothes. I even had a client in Nashville who sold a fiddle and was able to pay
off all of his debt.”

The end game

For any type of debt elimination, the consumer’s ultimate goal should be
to ensure that the solution they use doesn’t put them in a weaker financial
position overall, says Lewis-Parks.

“For instance, using a home-equity loan to pay off credit card debt is usually
not advisable because it effectively converts unsecured debt to secured,” she
says. “If the borrower fails to pay off the home-equity loan, now they face
higher risk due to the threat of foreclosure. The same is true of using
retirement income to pay off debt. This decreases long-term savings, putting
the consumer in a weaker financial position than when they started.”